The Future is Online – Is the cost going to drive Microsoft out of business?

I’ve read several articles about the increasing price for real estate to build data centers in “resource-rich” location. A corollary to that with a short reference in this article is the increased stock value of companies that provide efficient hardware:

Rackable Systems Inc. (RACK ), which sells highly efficient servers and data storage equipment, has more than tripled its stock price since going public in June, 2005. And a surge in demand for Advanced Micro Devices Inc. (AMD )’s power-sipping server chips is one reason it is humbling rival Intel Corp. (INTC ).

It then struck me as I was reading this:

Microsoft already owns server farms that are equal in size to a dozen Madison Square Gardens and consume as much power as 100,000 homes. The company deployed more new servers in the first quarter of this year than in any full year in its history.

that their cost of services vs Google will make it much more difficult for them to compete, and ultimately might drive them out of business.

If they require twice as much hardware to provide the same service at the same price to the end user, then the only way you stay in business long-term is finding the money from elsewhere. Either by a different end-user price for the same service or cross-subsidizing. The former will eventually (unless you cheat) drive your customers to other suppliers and the later probably not helped by the new business which is driving income from other sources to the new online destinations.

Of course, I think given Microsoft size that being driven out of business is not likely, even in the medium term. However, it is interesting to note that even though Microsoft has cheated in the past new technology is making it much easier for market forces to generate better value for the end-user.

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  1. Robin Harris Said,

    June 7, 2006 @ 12:04 am

    Microsoft may be a brutal monopolist with some of the highest profit margins outside of organized crime, but they have not, IMHO, shown the ability to re-invent themselves that IBM and HP have. They are still very much a creature of Bill’s personal vision, which has always been about the small-scale use of computers. While they can obviously buy anything they want, including visionairies, if they pick the wrong vision they still get stuck.

    Letting go of the Windows/Office franchise at the right time will be their challenge. It takes a long time for highly profitable multi-billion dollar businesses to fail. Look instead for increasing irrelevance, even with increasing profitability, as the marker for their eventual decline.

  2. Richard Parry Said,

    June 7, 2006 @ 6:35 pm

    Diversification and commoditisation are cornerstones of Microsoft’s business. If you take the stats of installed servers in isolation you might consider it’s a lot, but they’re using them to enter a lot of business states:

    1. Mobile computing.
    2. Search engines.
    3. Gaming (Xbox Live).

    They don’t want to compete with, say, Google – they want to compete with the world. I doubt that their investment in hardware will undermine their business especially with maturing technologies like VMWare or Virtual Server (which they own).

    They’ve stated recently that Windows and Live Anywhere are two key strategies for owning your soul, so watch out for that. I would be expecting a new tablet/portable device to support mobile entertainment in conjunction with Vista, all tied nicely in with Xbox Live and your new X360. Consumers drive the economy, and if you can sell enough Xboxes to enough people it’s a bit of a no brainer.

    Their market economy for Live is driven by subscription, and because it’s a captive market that offers solution no one else does, they’re going to rake the profits of that for a while. Sony might catch up with the PS/3, but they might not – and at that point, MS will have seen ROI on their server investments (for say gaming).

    I think it’s romantically attractive to think Microsoft are going to go out of business but not really feasible. As a player in a major corporate here, I can see Microsoft doing more innovative things to capture our dollar than IBM and HP ever are, no matter how remade they might be 🙂

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